Obama's Fix To 'If You Like It, You Can Keep It' Is A Destructively Easy Way Out

David
Dranove is the Walter McNerney Professor of Health
Industry Management at Northwestern University's
Kellogg School of Management, where he is also
Professor of Management and Strategy and Director of
the Center for Health Industry Market Economics.

Craig Garthwaite is Assistant Professor of
Management and Strategy at Northwestern University’s
Kellogg School of Management and is an applied
microeconomist whose research focuses broadly on public
economics and health economics.

Recent Posts

Last week President Obama announced that he will try to keep his
oft repeated promise to Americans in the individual market that
they can keep their plans if they like them … for a year.

The media have done an excellent job explaining why President
Obama’s temporary patch to the ACA may endanger its existence; in
the process the American public has learned more than it ever
wanted to about adverse selection, cream skimming, and most
importantly crass politics.

Though the full costs of adverse selection will be muted in the
first year by risk corridors and reinsurance, it is clear that
the failing website, the bad press, and the recently announced
delay are placing maximal stress on even those backup provisions
of the bill.

Even if the ACA survives this additional insult against the
economics that support its very existence, we have witnessed yet
another missed opportunity for positive reform to President
Obama’s signature legislative achievement. And this time we can’t
just blame intransigent tea-party Republicans and their quixotic
efforts at repeal; here the buck stops at 1600 Pennsylvania Ave,
NW.

While many of the plans that are affected by the President’s
temporary patch might actually be plans that don’t qualify as
“insurance” (i.e. they have low lifetime caps on expenditures or
don’t cover hospital services), numerous others actually offer
quite good coverage that just don’t meet the exceptionally high
standards of the newly developed minimum essential health benefit
(EHB). In many ways, the first dollar coverage for preventive
care and the wide ranging number of services covered by the ACA
aren’t truly insurance either. Instead, these features amount to
a very generous pre-payment plan for medical services supported
by the United States treasury.

These elements of the EHB are too costly and unnecessary. Perhaps
even more concerning, they are just the ante. As time goes on,
vested interests for everything not included in the EHB will work
tirelessly to insure that their favorite benefits are included.
If you want evidence of this eventuality, you need look no
further than the remarkably long and growing list of benefits
mandated by most states. Keep in mind that as the EHB grows more
generous the premiums and subsidies on the exchanges will also
grow. And we know who will pay their “fair share” of those
increases.

Given these facts, the President should have used the recent
attention on the individual market as an excuse to pause, and
carefully reconsider whether the EHB has actually been set far
too high. Doing so would allow insurers to develop innovative
benefit designs to create health insurance plans that provide
quality coverage without exacerbating the growth of medical
spending.

Instead, the President chose the easy path. Let’s kick the can
down the road and perhaps we can delay the next round of news
stories about policy cancellations in the individual market until
after the 2014 mid-term elections.

Beyond simply delaying the inevitable, the “policy” change
announced last week could threaten the very existence of the ACA.
To understand why, we provide a short history lesson.

Stanford Professor Alain Enthoven described a prototype for
health insurance exchanges in 1978. Over the next two decades,
the idea for exchanges was fully developed; the estimable Jackson
Hole Group of leading academics, policy wonks, and industry
executives produced at least two serious national health
insurance (NHI) proposals centered on exchanges. A bipartisan NHI
proposal featuring exchanges was debated during President
Reagan’s tenure, and again at the time of President Clinton’s
ill-fated NHI proposal. Finally, in the mid-2000s, Massachusetts
launched its exchange.

During this time, academics came to understand what it would take
to have a viable exchange. The young and healthy would have to
participate, which in turn meant there would have to be a complex
system of subsidies and penalties. And while it would do a world
of good to end employer-sponsored insurance (see our previous
blogs), the short term disruption and political roadblocks would
be severe. So exchanges would have to compete side-by-side with
other insurance options, which would have to be regulated lest
bare bones plans skim the healthy enrollees from the exchanges.

This, in turn, would surely force many individuals to lose their
current coverage, and a number of those individuals who don’t
qualify for subsidies will likely face much higher premiums. This
is how we ended up with the hybrid ACA proposal and, because the
plain economic truth was hidden from us, the broken promises.

From the beginning, opponents of the exchanges fell into two
camps. The first and by far the larger camp offered a purely
political reaction to any proposal offered by President Obama. We
could expect such a reaction from tea party Republicans who are
still searching for the President’s birth certificate.

But we are disappointed by the moderate, supposedly pro-business
Republicans who failed to see how moving away from
employer-sponsored insurance could unshackle America’s
businesses, especially small companies and entrepreneurs. We
would have hoped that the establishment members of the Republican
Party would have taken the opportunity then, or at least now when
President Obama appears to be more amenable to compromise, to
make the exchanges into a positive economic force. For example,
they could have crafted a compromise to lower the EHB and expand
the availability of high deductible health plans on the Bronze
tier of the exchanges.

Exchanges and their many rules may sound crazy, but there is
method to the madness. The President may have lied about the
implications of these rules, but they are at least internally
coherent. At least they were internally coherent before the
latest delay.

And that brings us to the second camp. From the beginning, we
joined with many free-market economists and other skeptics in
opposing the ACA because we feared that ugly politics would trump
sensible economics. The heavy hand of politics appeared early on,
when a variety of budgeting tricks were employed to make the ACA
appear to be revenue neutral. (Does anyone recall that the tax
increases to fund the exchange subsidies began fully three years
before the first dollar in subsidies would be paid out?) States
were supposed to launch their own exchanges, but the federal
option was introduced to deal with political realities. Efforts
to rein in spending on high cost/low value medical technologies
were abandoned to avoid any notions of “death panels.”

Finally, and more recently, the employer mandate for insurance
was delayed by a year because of difficulties in implementation.
We can now add to this list the “you can keep your plan” lie and
the temporary patch for those who did not keep their plans. All
of these are example of how the ACA has become much more about
politics than about sensible policy. Both sides must take the
blame for this result.

And so the greatest danger of large scale government intervention
is laid bare for all to see. We greatly admire our colleagues who
have diagnosed the ills of the U.S. health insurance system. We
agree with them that “properly implemented” exchanges can assure
that nearly all Americans obtain insurance coverage, promote
competition among insurers, and liberate Americans from the yoke
of tying insurance to employment.

But in a two party system, especially with today’s two and a half
(we can’t count the tea party as a distinct party but it is hard
to lump them in with more sensible Republicans) parties, national
politics continues to trump economic theory. Exchanges may be
working reasonably well in Massachusetts, but nationwide? Good
luck to that. (Wasn’t that Romney’s message? Like him or not, he
sure got it right that solutions that work well in one state
might not translate to the nation.)

As each day brings sadder news about the exchanges, we are
reminded that it is easier for a camel to pass through the eye of
a needle than it is for politicians to properly implement complex
economic policies.